Will competitive market work for home, auto insurance rates?

The Outlook

February 23, 1997|By Bill Atkinson

HOMEOWNER and auto insurance rates skyrocketed in parts of Maryland after a change in state law allowed insurers to raise rates without prior hearings or approval from the insurance commissioner. The rate increases sparked moves in the General Assembly to repeal the so-called competitive rating system. Three of those bills died in committee last week as industry lobbyists argued that the new system had not yet had enough time to allow market forces to work. A fourth bill that would require refunds to consumers hit by excessive increases is still pending.

Is competitive rating the best system for Maryland? Will it eventually lower premiums? Should the state's insurance commissioner have more oversight?

Sharon Tennyson

Assistant professor of insurance, Wharton School, University of Pennsylvania

Getting involved in pricing is probably going to introduce other -- distortions in the market. In general, you see the market works pretty well in states that keep their hands off of directly setting rates. These types of insurance markets are pretty competitive even for the big companies. It is not going to be the case that

they [insurance companies] have a lot of power to charge the sort of rates they can dictate.

Currently, just over half the states directly intervene in rate-setting in the personal insurance markets, and the remainder have more or less competitive rating. Most states that regulate don't do so with a particularly heavy hand. There are a couple of states that get heavily involved and those states have some problems in their insurance markets: Companies don't want to write there, rates are high for everybody because there is not a lot of competition.

You'd think that a completely deregulated system would benefit insurance companies, but surprisingly sometimes it's the companies that come crawling back to the regulators.

What you are going to get is a kind of bifurcation of insurance companies. The largest and richest and most nimble will be able to use a deregulated system most effectively. They will cut rates when they want to cut rates to buy market share, and they will usually start raising rates in the counties and the states where they get a dominant position.

The smaller local companies and regional players will be market followers and they are the ones who usually get creamed. What it usually means for consumers is a lot more caveat emptor.

You will see fluctuation in the rates. You may get a drop in rates for a while, but the long-term prospect is, you probably will see rates increase. I'm sort of a free-market guy by temperament, but deregulation doesn't always create the consumer advantages that it does in other fields. The sort of economies of scale and the differences between big players and small players, deregulation just plays into the hands of the giants.

Deborah Senn

Insurance commissioner, state of Washington

It differs from state to state, but generally the insurers push very hard to remove as much oversight as possible, and the reason is that they have more flexibility to raise their rates unhindered.

I think oversight is important. I think there is a role for the regulator because the product is so complicated. It is not as simple as buying shoes.

We have a prior-approval system for auto insurance, which means you have 30 days to review the rate before it goes into effect. In the state of Washington, we have brought down the increase in rates by pretty aggressive oversight.

Robert Hoyt

Risk management and insurance professor, University of Georgia

The advantage of an open-market competing kind of structure is if costs go down, we will all benefit from reduced rates. Unfortunately, many of the trends for homeowners and insurers have gone up.

It is the costs that are ultimately driving things. I'm talking about accident rates and the dollars that get chewed up in those accidents, or homeowners' rates and the levels of those losses.

On the homeowners' side, it has been a relatively stable and relatively profitable line of business for insurance companies. That hasn't been true for the last several years, obviously with the big hurricane in Florida. Insurers on the homeowners' side have become particularly aware of exposures. I think that has put a lot of pressure on rates, which I think are justified.

On the automobile insurance side, certainly more pressures have existed for a longer period of time because of legal pressures. Regardless, the pressures are there in almost all areas of the country. Maryland is a good example. It doesn't really matter what regulatory system you use; ultimately those costs have to flow through to the consumer.